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China Lifts Obstacles for Private Industry

By John Pomfret, Washington Post, Wednesday 5 January 2000; Page A1

BEIJING, Jan. 4 - China announced today it plans to scrap all obstacles to developing the economy's private sector, giving one of its strongest endorsements ever to free enterprise in response to economic problems that the government said demand urgent solutions.

The announcement, made by State Development Planning Commission Chairman Zeng Peiyan, was a remarkable acknowledgment that China's multibillion-dollar effort to resuscitate its moribund state-run sector has failed. It also indicated that China's leadership has realized that private industry, the most dynamic piece of China's economic puzzle, is a key to the future of the economy.

The influential planning commission announced that private enterprises should be put on an equal footing with state-owned enterprises for the first time since the 1949 revolution.

This is a significant ideological shift, said Fred Hu, the executive director for economic research at Goldman Sachs in Hong Kong. It's long overdue. It shows the government is getting desperate to improve the economy.

In a statement, Zeng said the economy faces problems that need urgent solution. Nineteen consecutive months of deflation caused by a lack of consumer spending, slowing investment in state and non-state sectors and reliance on state investment have contributed to a weakened economy.

Zeng said the government would actively guide and encourage private investment and would eliminate all restrictive and discriminatory regulations that are not friendly toward private investment and private economic development in taxes, land use, business start-up and import and export.

Most significantly, the statement dangled the prospect of unprecedented access to China's two stock markets ? in Shanghai and Shenzhen ? for China's private firms.

Except for the areas that are related to national security and those that must be monopolized by the state, all the rest of the areas should allow private capital to enter, it added. Most economists say everything but the military, telecommunications and energy industries, along with some parts of the transportation sector, will be opened to private competition. State-run monopolies in exports, imports and manufacturing, for example, will be dismantled.

Hu said part of the motivation for the decision announced today was concern that Western firms will be able to roll over Chinese competitors after China enters the World Trade Organization in the coming months.

Currently, private companies face numerous obstacles that are stymieing their development. Lack of access to capital ? either through bank loans or public stock offerings ? has long been a major problem. Private businessmen are often forced to pay bribes to get an operating license. Private firms are routinely ordered to register as state-owned companies, but often corrupt government officials take control of the firm and toss the owner in jail.

Hu said Zeng's statement was significant because it recognized the importance of private industry to China's future ? no small feat for a government that remains ideologically fearful of the possibility of a privatized economy. Indeed, on numerous occasions, President Jiang Zemin has pledged that China's economy will remain mostly state run ? even though economic statistics show that by the mid-1990s more than half the economic output came from the non-state sector. Today, Jiang called for Marxist ideological education to be strengthened.

In part, the Communists are against privatization on ideological grounds, but mostly they are concerned about power. State-run firms constitute a huge economic resource and power base for the party. Without them, the party would have to rely on less dependable parts of China's polity.

Hu said the announcement was another step toward recognizing that only privatization will solve China's long-term economic problems. Last year, the parliament changed the constitution to elevate the private sector from a complementary part of the economy to an important component.

Fifty million new workers enter China's labor force annually. The state-run sector is contracting at a rate of at least 3 million workers a year. Without the private sector, most economists predict massive social unrest in China's cities.

The government said its economy grew at a rate of 7.8 percent in 1998 and has released provisional figures showing a growth rate of 7.1 percent last year, a rate Zeng said China would be able to maintain this year. But Western and Chinese economists said the growth figures from 1998 and '99 appear exaggerated by several percentage points. Regardless, private firms and other non-state businesses comprised the bulk of the economy's growth.

For example, Hu said China's state-owned firms sucked up 70 percent of the new investment last year. And they employ 56 percent of the labor force. But last year they accounted for less than 40 percent of industrial output.

Despite today's statement, it appears that state-run firms will still benefit from the government's largess. Zeng said last year's government program to stimulate the economy by issuing $24 billion in bonds for infrastructure projects and to reform such industries as iron and steel will continue.

Western and Chinese economists have warned that this program could bury the economy under a mountain of debt unless consumers resume spending and firms start investing again.